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Trading Coca Cola Ahead Of Earnings

Published 25/04/2017, 05:13
Updated 09/03/2019, 13:30

Coca Cola is expected to report earnings this week, and that should have a large impact on the stock. Prior earnings show that it has a long way to go before it can break its downward trend. A structural shift in the company will occur in hopes of sparking growth. There is a major headwind for the soda giant.

Earnings Forecast

Coca-Cola Company (NYSE:KO) will reveal its first-quarter earnings on April 25, 2017 before the opening bell. The expectation is that it will report $0.44 cents per share on revenue of $8.97 billion. The earnings per share number last year in the same time period was at $0.45 cents.

This new forecasted EPS is a small drop compared to last years number. The key is to see if if Coca Cola can beat that metric. A surprise beat over the $0.44 cents per share number will likely boost the stock higher. The main issue that may continue to plague the company is that the full year 2017 forecast has been marked lower.

The company expects to see between a 1% to 4% fall from $1.91 per share in 2016. This is not good at all. That is because analysts were expecting full year 2017 earnings to hit around $1.97.

Prior Earnings

The previous earnings report for the fourth quarter of 2016 was just about in-line with estimates. Coca Cola reported that it had earned $0.37 per share which was in line with analysts’ forecast. Revenue for the quarter fell by 6% to $9.41 billion.

There is a positive aspect and a negative one about the reported revenue. The bad news is that it is the seventh straight drop in revenue for each reported quarter. It is never a good thing when net operating revenue has dropped so much. The good news was that it beat the estimates set by analysts of $9.13 billion.

Structural Change

One of the key reasons why earnings and net revenue have fallen is because of lower beverage sales. On May 1, there will be a new Coca Cola CEO by the name of James Quincey. He has made it clear that the company must refranchise itself in order to stay afloat.

The lower than expected beverage sales has been because of a shift to no-calorie beverages. The government and other health agencies have expressed concerns about drinks that have a lot of sugar in them.

The market is starting to shift as more consumers are leaning toward buying drinks with no sugar in them. Coca Cola has moved more towards its no calorie sodas. This has already been proven with the recent earnings reports. Quincey has stated that zero calorie colas are now outpacing total volume of the regular coke portfolio. Global volumes of non-carbonated drinks such as energy drinks and juices rose by 4% in the most recent quarter.

Bottling Refranchise

Another change involves Coca cola refranchising its bottling operations. It has been spending quite some time changing how it operates its bottling centres. The most notable change is offloading its low-margin bottling business. By selling a lot of its North American bottling businesses it has been able to shift operations. The problem is that in the fourth-quarter earnings report, the company has stated that there was a $919 million charge related to its refranchising of its bottling operations. This cost should continue well until the end of 2017.

Major Headwind

A major headwind for Coca Cola has been currency exchange. That is because the company earns half of its revenues from outside the United States. With the dollar trading higher, it has caused other currencies to weaken across the globe.

This directly affects the company’s earnings. The lower value of currency across the globe means less revenue being produced for Coca Cola. The company estimates that the currency headwind will cost it up to a loss of 3% to 4%.

What Traders Should Watch For

There are a few things that traders should watch for. The first of which is the upcoming earnings report. The key item to watch for would be to see if the trend in lower earnings can be broken. A positive surprise in earnings would not only lift trader sentiment, but improve growth.

The second item would be the structural change on the new targeting front. The key would be to see if the switch to non-calorie sodas is starting to pay off. A good step in this direction would prove that the change to healthier drinks was a necessary one.

The third item would be the bottling franchise. Traders must look for guidance to see how big of a charge Coca Cola will have to take each quarter because of the effort. This must be done until the end of 2017, when the refranchise of the bottling operation should be completed.

The final item that traders should keep an eye on would be the currency exchange. The company estimated how much it would lose to a stronger dollar. It will have to be observed if this holds true. The only way to improve this situation would be if the dollar starts to weaken in the coming months.

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